Public Opinion

Becoming synonymous with inflated valuations and dotcom disasters hasn't done much for IPOs' reputation. How long before we can start to talk about going public again without snickering?

When San Diego-based biotechnology firm MitoKor filed for an IPO in March 2002, the market for new issues was looking downright abysmal. Gone were the heady days when "concept companies" with no revenue to speak of--let alone profits--debuted to great fanfare and triple-digit first-day returns. Instead, "newcos," or prospective new issuers like MitoKor faced a marketplace still reeling from the demise of the dotcom frenzy, the trauma of terrorism and investors disillusioned by the Enron debacle--all of which upped the ante for IPO--bound firms.

"To go public today, you will have to show eight quarters of solid revenue growth, an organization where costs are controlled and probably at least four quarters of profitability," asserts Mark Jensen, partner and national director of venture services at Deloitte & Touche.

"There's also a tremendous push from investors for greater transparency with financials," adds Steven Barnes, principal and CFO at Wayne, Pennsylvania-based venture capital firm PA Early Stage. "The public market is demanding not just the numbers, but that you show how they were derived."

Tried and True
With IPO hopefuls facing that tall order, small wonder that the first quarter of 2002 saw just 15 make the private-to-public leap, compared with 126 in the first quarter of 2000. So what prompted MitoKor, which posted a net loss of $21 million in 2000, to brave the plunge? Paradoxically, it's among a handful of companies that are finding an upside to the IPO market's new outlook. "In the heady dotcom days, investment bankers were telling us that no one was interested in biotech because technology was taking over the world," recounts 40-year-old MitoKor CFO and management team member Craig Johnson. "We're not hearing that argument anymore."

"In the IPO craze two years ago, the median age of companies going public was three years; today it's 15."

Too true. Technology firms, which accounted for 70 percent of public offerings in 1999 and 2000, constituted less than a third of new offerings in the first quarter of 2002. Instead, the IPO pipeline spat out more traditional businesses, from spinoffs like Citigroup's Travelers Property Casualty and Nestle's Alcon to new entries from mature industries, like air travel's JetBlue and health care's Medical Staffing Network.

In the current climate, a company's IPO prospects depend heavily on its market sector's performance, says Rick Bartlett, co-head of U.S. equity capital markets at investment bank Salomon Smith Barney. "The IPO market is very sector-specific," says Bartlett, who advises companies considering IPOs to gauge their potential by observing peers in the open market. "If your company is in a hot growth sector, it can go public."

Proven staying power also factors into the equation. In the IPO craze two years ago, says Jay R. Ritter, a professor of finance at the University of Florida at Gainsville who maintains a database on new offerings, the median age of companies going public was three years; today it's 15.

On the plus side, those who make the grade are faring relatively well compared to the overall market. First-day returns for 2002 new issues after the first half of 2002 are averaging 9.9 percent, according to Greenwich, Connecticut-based IPO research and investment firm Renaissance Capital (see "Times Are a-Changin'"). Even the half-yearly average total return for 2002 IPO stocks (8.6 percent) starts to look downright rosy when stacked against today's market figures, points out William Smith, president and portfolio manager of Renaissance Capital's IPO Plus Fund. "The performance of 2002 IPOs is far below the double- and triple-digit jumps we saw in 1999 and 2000," he says, "but compared with the NASDAQ, down 34.3 percent this year, that's not bad at all."

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This article was originally published in the October 2002 print edition of Entrepreneur with the headline: Public Opinion.

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